Kenya: No withholding tax on payments to South African entity under income tax treaty

Since the tax authority did not establish that the South African entity had a permanent establishment in Kenya, no withholding tax applied

Tax authority did not establish that the South African entity had permanent establishment

The Tax Appeal Tribunal issued a judgment holding that amounts paid from a Kenya branch to a related entity in South Africa were not subject to withholding tax pursuant to the provisions of the income tax treaty between Kenya and South Africa.

The tribunal’s decision found that since the tax authority did not establish that the South African entity had a permanent establishment in Kenya, no withholding tax applied.

The case is: McKinsey & Company Inc. Africa Proprietary Ltd v. Commissioner of Legal Services and Board Coordination, Appeal No. 199 of 2020

Summary

The taxpayer (a limited liability company incorporated in South Africa) operated a registered branch in Kenya whose principal activity was the provision of consultancy services including strategy, operations, and financial and human resource consulting.

The tax authority in Kenya conducted a tax audit for the years 2014 to 2018 and issued an assessment in October 2019 for additional withholding tax on professional fees that the taxpayer paid to a related entity (a resident of South Africa). The taxpayer objected, asserting that no withholding tax applied pursuant to provisions of Article 7 (business profits) under the income tax treaty between Kenya and South Africa.

The tribunal found in part that:

  • The income tax treaty stipulated that income is taxable in the country where the enterprise is a resident (in this case South Africa) unless it has a permanent establishment in Kenya.
  • The tax authority did not establish that the South African enterprise had a permanent establishment in Kenya. Thus, there was no support for the claimed withholding tax in respect of the payments made by the taxpayer to its related entity in South Africa.

Read an April 2021 report [PDF 158 KB] prepared by the KPMG member firm in Kenya
 

 

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